Taking the Leap

Consider how your CU can help members find happy financial landings.

Last Saturday I stood atop a metal platform, harnessed to a zip line high above the treetops. The day was brisk. My hardhat was functional, yet stylish.

I had worked up the courage to confront my fear of heights in a bold and defiant way.

I listened to my guide’s final words. “OK, all set. Stand at the edge and get ready to fly. Don’t worry, Stephan will catch you on the other side. This is a fast zip and the breeze is going to send you along today. So go ahead, Lora. Step off.”

Intellectually I knew there was limited risk for bodily harm, and a thrill waited ahead--provided I did not faint. Still, a primal part of me wanted to unhook myself and turn back. Stephan was invisible.

Librarians don’t do this, I thought. Better to be reading a book.

I clutched the tether, took a deep breath, gulped—and leapt off.

Many consumers find themselves in precarious financial situations; thrashing about on a roller coaster of juggling bills, confronting employment fears, and wondering how to conquer fiscal challenges.

Research this week reveals payday lenders often are the “go to” source for help and security.

Of course, credit unions are a better option. But like Stephan, might you be an invisible landing place in their time of fearfulness? Read on to learn about current needs and practices of these consumers. Consider how you can help them find happy landings.

‘I don’t have a fear of flying; I have a fear of crashing.’—Billy Bob Thornton, American actor

First, let’s examine why some are tempted to resort to payday lenders.

Income is an important component in financial security. Currently, the employment gap between rich and poor is the widest on record, National Public Radio (NPR) reports.

In fact, unemployment rates for families earning less than $20,000 per year have topped 21%, “nearly matching the rate for all workers during the 1930s Great Depression,” according to NPR.

Interestingly, many “low-wage workers are now older and better educated than ever,” and there have been especially large increases in the percentage of low-income workers with at least some college-level training.

The average duration of unemployment is long: 39.5 weeks as of 2012, the highest level since World War II. And, “because many mid-skill jobs are being lost to globalization and automation, recent U.S. growth in low-wage jobs has not come fast enough to absorb displaced workers at the bottom.”

How are consumers making ends meet in times of economic and social shift?

The “Make-up of Non-Bank Customers Changes,” observes Boston College. “More Americans… say they have used nontraditional financial services, such as check cashing, or are getting loans from places like pawn shops, payday lenders, or firms that offer advances on IRS refunds.”

In fact, 41% had done so in 2011, up from 36% in 2009.

Nonbank loans are becoming an increasingly important source of funds for consumers. “Once associated with minorities, immigrants, and low-income workers… they’re more prevalent among nonHispanic whites, college graduates, and people who earn more than $50,000.”

“Workers Struggle Day to Day,” says Boston College. This blog post comments on findings by the FINRA Education Foundation, which reports that a sizable minority of Americans say they spend more than they earn, have overdue medical bills, or make only the minimum payment on their credit cards.

Further, “Pulling together $2,000 may seem like only a modest challenge for someone with good pay and benefits. But 40% percent of the people surveyed also indicated they would be hard-pressed to find that much money if they needed it.”

The FINRA study reveals strategies Americans use to handle financial emergencies. They include:

Relying on family and friends (34%);

Using credit cards as a primary source of funds (30%); and

Resorting to payday loans or pawnshops (11%).

Overall, “the findings suggest that more than 46% of all respondents are living close to the financial edge.”

‘Flying is learning how to throw yourself at the ground and miss.’—Douglas Adams, English writer

Most payday loans are used “to cover ordinary living expenses over the course of months, not unexpected emergencies,” with 69% of first-time payday loan borrowers using funds to make credit card or mortgage payments, or to pay for rent or food.

Lack of access to payday loans would prompt users to cut expenditures, delay paying bills, and rely on friends. Only 44% say they would take out a loan from a bank or credit union.

Examine “Payday Lending Abuses and Predatory Practices” from the Center for Responsible Lending. This compelling study analyzes the impact of such lending on households, revealing that they often create a “debt treadmill” and foster situations in which borrowers are “worse off than they were before they received a payday loan.”

Some factors contributing to a “worse off” scenario include high fees, lack of underwriting ensuring affordability, short-term due dates, single balloon payments, and post-dated checks or access to bank accounts as collateral.

Might technology help those who look to alternative loans for help?

Smartphones are important resources for the unbanked, according to Brookings. In the developing world, mobile money services “are used to move billions of dollars every month.”

Further, “Mobile money will drive digital inclusion in developing countries in ways that go far beyond the set of currently available transaction-focused services.”

An interesting question “may be what the developing world will look like when cost declines bring entry-level smartphones within financial reach of nearly everyone. This paper proposes some answers to that question and identifies some ways to maximize financial and digital inclusion using mobile technologies.”

My zip line experience was exhilarating, fun, and a successful step toward conquering my fear of heights. I not only enjoyed the ride, but appreciated the security I knew awaited me on the opposite platform.

Imagine how you can help those tempted to resort to alternative financial services. Perhaps Ralph Waldo Emerson’s words will prove thought provoking: “The line between failure and success is so fine that we scarcely know when we pass it—so fine that we often are on the line and do not know it.”